Supporting Stable Development of the Norwegian Economy

The Norwegian economy has in the past four years experienced its strongest expansion since the 1950s. Recent developments, however, suggest that the cyclical peak has been passed, and the international financial turmoil has increased the uncertainty about the outlook for the economy. In accordance with the fiscal guidelines, the Government proposes a Fiscal Budget for 2009 with a structural, non-oil budget deficit of NOK 92 billion. This is on par with the expected real return on the Government Pension Fund – Global, and implies an increase in the spending of oil revenues of NOK 14 billion in real terms.

The turmoil in the international financial markets influences developments in Norway. As the financial unrest has grown, the uncertainty about the outlook for the world economy has increased, making short-term economic prospects for Norway more uncertain as well. However, the Norwegian economy is fundamentally strong. The guidelines for economic policy lay a good foundation for a stable development of the Norwegian economy.

The fiscal policy guidelines, in place since 2001, stipulate that fiscal policy shall be geared towards a gradual increase in the use of petroleum revenues. Over time, the structural non-oil central government budget deficit shall correspond to the expected real return – estimated at 4 per cent – on the Government Pension Fund – Global. However, the guidelines also allow fiscal policy to be used actively to counter fluctuations in economic activity. Thus, fiscal policy may support monetary policy to facilitate a stable development of the Norwegian economy. Long term budget challenges, due to increased pension costs and other age-related expenses, underline the importance of a continued prudent fiscal policy stance.

The Government proposes a Fiscal Budget for 2009 with a structural, non-oil deficit of NOK 92 billion. The structural deficit is on par with the expected real return on the Government Pension Fund – Global, following three years of deficits below the 4 per cent path. This implies an increase in the use of petroleum revenues from 2008 to 2009 of NOK 14 billion in real terms. As a share of Mainland trend-GDP, the structural non-oil deficit increases by 0.7 per cent. The domestic demand stimulus is estimated to be of the same magnitude.

The budget proposal allows for some important policy measures. Priority has been given to further expansion of public welfare i.e. health care, education, and day-care for children. The overall level of taxation will be kept unchanged, but the distributional effects of the tax system will be improved.

 

Fiscal Policy

The main features of fiscal policy in 2009 are:

• A structural, non-oil budget deficit of NOK 92 billion, which is on par with the expected return on the Government Pension Fund – Global.
• An increase in the structural non-oil deficit of NOK 14 billion in real terms from 2008 to 2009. The structural non-oil deficit as a share of Mainland trend-GDP increases by 0.7 per cent.
• A real underlying growth in Fiscal Budget expenditures from 2008 to 2009 of 3¼ per cent.
• Unchanged overall level of taxation.
• A non-oil fiscal budget deficit estimated at NOK 48.7 billion. The deficit is covered by a transfer from the Government Pension Fund – Global.
• A central government net cash flow from petroleum activities of NOK 407 billion.
• A net transfer to the Government Pension Fund – Global of NOK 358.5 billion.
• A consolidated surplus in the Fiscal Budget and the Government Pension Fund, including interest and dividends, of NOK 446 billion.
• An estimated market value of Government Pension Fund – both the international and domestic part – of NOK 2 915 billion at the end of 2009. The capital in the Fund will still be considerably lower than the old age pension obligations under the National Insurance Scheme.
• An increase in total revenues for local governments of 3 per cent from 2008 to 2009.

Tax Policy

The main tax proposals for 2009 include:

• A broadening of the tax base of the net wealth tax, including increased tax values for commercial real estate and abolishment of the 80-per cent rule that constrains the wealth tax for the very wealthy with low taxable income, combined with a considerable increase in tax-free allowances.
• Substantial increases in the allowances and reductions in the rates of the inheritance tax. At the same time, tax values of privately owned companies are increased.
• An extension of BSU, a scheme stimulating bank savings for young people who plan to buy their own home.
• Abolishment of a special tax exemption for a group of mutual insurance companies.
• Separation of technical installations in buildings into a new asset group for tax depreciation purposes. This will increase the depreciation rate on these assets from either 2 or 4 per cent up to 10 per cent.
• Adjustments in the motor vehicle registration tax, further strengthening incentives to purchase cars with lower CO₂-emissions by introducing a tax deduction for low emission cars and an excess tax for cars with emissions above 250 grams per km.
• An increase in the excise tax levied on non-alcoholic beverages.
• Increased tax on snuff tobacco.

Monetary Policy
The monetary policy regulation of 29 March 2001 stipulates a flexible inflation targeting regime for monetary policy. The long-term role of monetary policy is to provide the economy with a nominal anchor. In the short- and medium-term, monetary policy shall balance the need for low and stable inflation against the outlook for output and employment.

Norges Bank’s (the central bank) implementation of monetary policy is oriented towards maintaining low and stable inflation. The operational target is defined as an annual increase in consumer prices of close to 2.5 per cent over time. The interest rate decisions of Norges Bank shall be forward looking, and pay due attention to the uncertainty attached to macroeconomic estimates and assessments. It shall take into consideration that it may take time for the policy changes to take effect, and it should disregard disturbances of a temporary nature that are not deemed to affect underlying price and cost increases.

Norges Bank has gradually increased the key rate during the last three years by 4 percentage points to currently 5.75 per cent.

 

The Government Pension Fund
The Government Pension Fund was established with effect from 1 January 2006, encompassing the former Government Petroleum and National Insurance Scheme Funds. The purpose of the Fund is to strengthen long-term considerations in the use of government petroleum revenues and to facilitate government savings to meet i.a. the pension expenditures of the National Insurance Scheme. The revenues of the Government Pension Fund – Global consists of the State’s cash flow from petroleum activities, which is transferred from the central government budget, the return on the Fund’s capital, and net results of financial transactions associated with state ownership in petroleum activities. The revenue of the Government Pension Fund – Norway is the return on the capital under management. The Ministry of Finance is responsible for the Management of the Fund, while the operational management is left with Norges Bank (Fund – Global) and Folketrygdfondet (Fund – Norway).

The Government Pension Fund is growing rapidly and is becoming one of the world’s largest funds. The value of the Fund assets comes close to the size of the Norwegian GDP, and the return on the Fund will make considerable contributions to the funding of state expenditure in coming years. The size of the Fund underscores the importance of ensuring that the investment strategy of the Fund, as well as its ethical and corporate governance guidelines, has a firm backing in the Norwegian Parliament – the Storting – and that the Ministry reports thoroughly on its follow-up of operational management of the Fund.

At the end of 2007, the market value of the Government Pension Fund – Global was NOK 2018 billion. The value is estimated to reach NOK 2 300 billion by the end of 2008 and NOK 2794 billion by the end of 2009. On current assumptions for future petroleum production and petroleum prices the Fund is expected to grow briskly for several years. The total value of the Government Pension Fund, including the Government Pension Fund – Norway, is estimated at NOK 2414 billion at the end of 2009.

 

General Outlook
Growth in the Norwegian economy has been strong for the past four years, with an annual growth in Mainland GDP of 5 per cent. This has been the strongest expansion in a four-year period since the 1950s. However, recent indicators suggest that growth in Mainland GDP has slowed, indicating a more moderate outlook for the economy. Weaker growth impetus from traditional goods exports and lower growth in household demand is expected to contribute to slower GDP growth. The financial turmoil has increased the uncertainty about the outlook for the economy. Growth in Mainland GDP is expected to decline from 6 per cent in 2007 to 3 per cent this year, and 2 per cent in 2009.

Employment growth has been very strong since 2003, and the unemployment rate is now at a 20-year low. The unemployment rate will remain low, albeit not quite as low as during the past year. A slowdown in economic growth ahead suggests that demand for labour will ease and employment growth level off. Unemployment is expected to average 2¾ per cent in 2009.

The tightening of the labour market the past few years have resulted in a wage growth almost as high as under the economic boom of the late 1990s. Based on the wage negotiation concluded so far this year, annual wage growth is estimated at 6 per cent in 2008. Wage growth is estimated at 5 per cent in 2009.

High capacity utilization and increased wage growth has contributed to an increase in the underlying price inflation. Adjusted for changes in excise duties and excluding energy, consumer price inflation (CPI-ATE) is forecast at 2½ per cent in 2008 and 2¾ per cent in 2009. Higher energy prices will contribute to a pick up in headline inflation (CPI) from 0.8 per cent in 2007 to an estimated 3¾ per cent in 2008 and 3 per cent in 2009.

The oil price has fluctuated considerably so far this year, with an average oil price close to NOK 583 per barrel. The projection in the National Budget 2009 is based on an oil price of NOK 585 per barrel in 2008 and NOK 500 in 2009.

 

Key projections for the Norwegian economy¹. Per cent

	2007 NOK billion2	2007	2008	2009
Private consumption	946.1	6.4	2.3	2.5
Public consumption	449.3	3.6	3.8	3.4
Gross fixed investments	473.1	9.3	4.6	-0.3
Petroleum	107.9	5.5	11.0	5.0
Business sector, Mainland Norway	168.0	12.5	7.9	-2.4
Exports	1042.7	2.8	2.2	2.5
Crude oil and natural gas	479.9	-2.8	-1.5	2.6
Traditional goods	302.4	9.0	5.9	1.8
Imports	686.3	8.7	5.3	1.8
Traditional goods	450.7	8.1	5.5	1.9
Gross domestic product	2276.8	3.7	2.0	2.3
Mainland Norway	1714.6	6.2	3.1	1.9
Memorandum items:
Consumer price inflation (CPI)		0.8	3¾	3
Underlying inflation (CPI-ATE)		1.4	2½	2¾
Wage growth		5.4	6	5
Employment growth		4.0	2.8	0.4
Unemployment rate (LFS)		2.5	2½	2¾
Current account balance (pct. of GDP)		15.4	20.5	16.6

¹ Constant 2005 prices
² Current prices
Sources: Statistics Norway and Ministry of Finance

 

Key figures for the petroleum sector

	2007	2008	2009	2012	Oil price sensitivity 2008 1
Assumptions:
Crude oil. NOK per barrel	423	585	500	423
Production. Mill. Sm3 oil equivalent	238	236	245	251
Crude oil and NGL	148	140	139	135
NOK billion:
Export value 2	491	666	599	528	7.4
Accrued taxes3	196	274	235	176	6.0
Paid taxes3	191	247	255	176	3.0
Net cash flow 4	316	425	407	300	5.7
1 Effects of an oil price increase of NOK 10 per barrel 2 Crude oil, natural gas, NGL and pipeline transport 3 Income tax, special tax on petroleum income, area fee and tax on CO2 emissions etc. in 2007 and 2008. 4 Taxes and excise duties, net revenues from SDØE (State Direct Financial Interest) and dividends from Statoil Sources: Statistics Norway, Ministry of Petroleum and Energy and Ministry of Finance

 

 

Key figures for the Fiscal Budget and Government Pension Fund. NOK billion

		2007	2008	2009
	1. Fiscal Budget
	Total revenues	1 030.1	1188.8	1206.5
	Revenues from petroleum activities	337.4	448.5	433.8
	Revenues excl. petroleum activities	692.7	740.3	772.6
	Total expenditures	715.1	778.1	848.0
	Expenditures on petroleum activities	21.2	23.9	26.7
	Expenditures excl. petroleum activities	694.0	754.1	821.3
Fiscal budget surplus before transfers to the Pension Fund – Global		315.0	410.8	358.5
- Net revenues from petroleum activities		316.4	424.6	407.1
= Non-oil budget surplus		-1.3	-13.8	-48.7
	+ Transfers from the Pension Fund – Global	2.8	13.8	48.7
	= Fiscal Budget surplus	1.5	0.0	0.0
	2. Government Pension Fund
	Net transfer to the Pension Fund – Global	313.6	410.8	358.5
	+ Dividends on the Pension Fund	78.4	84.2	87.2
	= Surplus in the Pension Fund	392.0	495.0	445.7
	3. Fiscal Budget and Government Pension Fund consolidated surplus	393.5	495.0	445.7

Source: Ministry of Finance

 

 

General government financial balance. NOK billion

	2007	2008	2009
Fiscal Budget surplus	1.5	0.0	0.0
+ Surplus in Government Pension Fund	392.0	495.0	445.7
+ Surplus in other central government and social security accounts	-6.4	0.8	7.3
+ Definitional differences between Fiscal Budget and national accounts	17.4	34.6	-19.1
+ Direct investment in state enterprises	4.1	6.6	8.8
= Central government financial balance	408.6	536.9	442.6
+ Local government financial balance	-11.2	-17.2	-13.5
= General government financial balance	397.4	519.7	429.2
In per cent of GDP	17.5	20.1	16.4

Sources: Statistics Norway and Ministry of Finance